Moving Up to Middle Class: Being Banked

The middle class spends differently than the working class and the poor.  This series, “Moving Up to Middle Class,” highlights the financial choices that differ between the middle class and the lower classes, as a guide to the upwardly mobile person raised in a lower class household.

One of the biggest financial differences between the middle class and the working class and the poor* is that the middle class has easy access to banking institutions, and the working class and the poor tend to be unbanked or underbanked.  This means that the working class and the poor disproportionately rely on alternative financial services such as check cashers, payday lenders, and money order sellers for basic banking.  If you were raised in an unbanked household, this may seem like a normal and appropriate financial strategy.  As you move up to middle class, though,  you will be expected to become banked, if not only for social reasons, but for financial reasons.  That’s because a well-managed bank account is a tremendous convenience and may even be profitable, while relying on alternative financial institutions can be tremendously expensive.  Let’s look at the numbers:

Fig 1: Table Comparing Banking Costs between 1. a well-managed bank account and credit card account, 2. comparable services available through alternative financial services companies, and 3. an ill-managed bank account and credit card account, all values by year
Activity Well-Managed Bank Accounts Unbanked Solution Ill-Managed Bank Accounts
Cost to maintain account1 none n/a ($180)
Cost to deposit/cash paychecks2 none ($93) none
Cost to issue checks/money orders3 ($15) ($60) ($15)
Short-term Loan to Payday4 none ($60) ($16)
Overdraft fees5 none n/a ($128)
Interest earned6 $15 n/a none
Profit/(Loss) $0 ($213) ($339)
  1. Cost to maintain account: composed of monthly or annual account fees. No annual fee accounts exist for both checking and credit. An ill-managed account assumes a $10 per month checking account fee ($120) plus a $60 per year annual credit card fee.
  2. Cost to deposit/cash paychecks: usually free with nearly all checking accounts. Cost for the unbanked calculated assuming twice monthly paychecks (24 per year), state and federal tax refunds (2 per year), and 5 other miscellaneous checks per year (total 31 checks). Multiply by the least expensive check cashing quote I could find at $3 per check to get $93 per year.
  3. Cost to issue checks/money orders: I assume that persons with a checking account buy one box of checks per year from their bank.  I assume that the unbanked need to purchase 100 money orders per year at the lowest price I could find quoted, which was $0.60 per money order.
  4. Short-term Loan to payday: I assume that twice a year a payday loan is needed, in which case $200 is borrowed and repaid in 7 days. In the well-managed account case, $200 is borrowed at point-of-sale by credit card, and paid off in 7 days. In the unbanked example, the borrowing is through a payday loan company at a cost of $30 per loan. In the ill-managed account example, I assume a cash advance is made from a credit card, with a fee of 2% of the balance ($4) and an APR of 21% for 7 days ($1), and an ATM fee of $3, for a total cost of $8.
  5. Overdraft fees: a well-managed bank account will not incur overdraft fees. I estimate an ill-managed account will incur overdraft fees four times per year at $32 each.
  6. Interest earned: A very high interest checking account will pay about 3% on deposits. Assuming $500 in average daily balance per month will earn $15 per year. An ill-managed account will earn negligible interest.

Throughout, I tried to be as fair as possible.  I used the best possible prices for the services that the unbanked use.  I tried to be as fair as I could with regard to the costs of various banking services.  I think it’s safe to say that being unbanked could be less expensive than having badly chosen and ill-managed bank accounts, it’s far more expensive than having well-chosen and sell-managed bank accounts.

The biggest argument against having a bank account are the fees that are incurred when the account gets below minimum balance or if it is overdrawn.  Seeing that this guide is for someone who’s now making middle class income, that shouldn’t be a problem.  (If it is, you may want to take a look at my series on budgeting.)

The point of all this is, when you move up to the middle class from lower classes, there are going to be some big changes in how you live your financial life.  One of those is becoming a bank customer.

And don’t be worried that you’ve never had a bank account before and that you’re unfamiliar with banks.  Just walk in to the bank lobby or look at its webpage and see what they have to offer.  You can even search for banks the way I search for banks.  When you’ve found something that looks good, deposit some money and open the account.  Just make sure you have the banker give you a copy of the fee schedule that goes with the account.  They have to provide you one if you request it, so don’t be shy.  Take some time to familiarize yourself with the costs and what triggers fees.  Then, enjoy your bank account!

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